November 21, 2011

An Uneven Recovery: The Chicago and Milwaukee Labor Markets

Max Lichtenstein and Scott Brave

The Midwest has benefitted from the recent rebound in manufacturing. Over the past year, total employment in the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin has increased by just over 145,000 jobs, 40% of which has been due solely to manufacturing.[1] The heavy concentration of job gains in manufacturing and related industries has led labor markets in some areas of the Seventh District to benefit more than others.

Consider the metropolitan areas of Chicago and Milwaukee.[2] Looking at figure 1, one can see that employment levels in the two cities have tended to move in parallel over the past two decades. This is as one might expect for two cities that are so close geographically. However, this correlation has recently faltered. Although the data indicate that the two cities entered the most recent recession in a similar fashion, Milwaukee has seen a much bigger increase in employment during the recovery.

This becomes clearer if one looks at the year-over-year percent changes in payroll employment for each city shown in Figure 2.[3] Early in 2010, both Chicago and Milwaukee saw around 1% job growth. Since mid-2010, job growth in Chicago has returned to near zero on a year-over-year basis, while Milwaukee has seen gains of close to 3% percent for a while before also slipping in recent months to a rate of about 2%. In fact, the Milwaukee metropolitan area’s job growth over the past year stands out as one of the highest in the nation.[4]

What could account for this sudden departure from the historical trend? Table 1 shows the percent change in payroll employment in various industries for each city during two time periods: the most recent recession and its recovery. Looking at the first row, one can see that total employment fell by nearly the same amount in both cities in percentage terms during the recession. Furthermore, the remaining rows demonstrate that the concentrations of job losses during the recession were fairly similar across industries with a few exceptions.

Milwaukee has, however, seen a more pronounced recovery in jobs since the end of the recession. Job growth has been greater for the manufacturing (particularly in durable goods but also for nondurable goods), wholesale trade, education and healthcare, leisure and hospitality, and government sectors in Milwaukee than in Chicago; and only in the professional and business services and transportation sectors does Chicago have the advantage in job growth. Furthermore, decreases in employment in percentage terms in the retail trade and information sectors have been smaller in Milwaukee than in Chicago. Such decreases in the financial sector have been of a similar size in both cities.

The industries where Milwaukee has seen greater job growth over the past 12 months relative to Chicago account for nearly 76% of total 2010 employment in Milwaukee. These same industries account for roughly 70% of total 2010 employment in Chicago. In this sense, the sectoral composition of the demand for labor has slightly favored Milwaukee’s core industries over the past year. However, this comparison can be a little misleading as it doesn’t take into account the linkages between sectors. For instance, transportation and wholesale trade in Chicago are likely to be influenced by durable goods manufacturing in Milwaukee.

The first thing we notice is that Milwaukee, represented by the green dot, consistently appears above the regression line, meaning that it performs better than the statistical average MSA in the Seventh District in nearly all the sectors we have data on. In contrast, Chicago, represented by the red dot, is essentially on the line in all cases. This result is broadly in line with our direct comparisons discussed before. In most industries, Milwaukee’s employment gains have exceeded the average gains based solely on industry concentration.

A second thing to take notice of is those industries with positive sloping trends, or those in which a higher concentration is correlated with a higher rate of overall job growth in the past 12 months. These industries are durable goods manufacturing and education and healthcare—two sectors in which Milwaukee has both a large concentration and large increases in employment over the past year. In this sense, our statement about the core industries for Milwaukee providing an advantage in labor demand over the past 12 months is more accurate.

Given the two cities’ past history, Milwaukee is not likely to maintain its advantage over Chicago unless the strength in manufacturing continues to outpace that of the service sector. Indeed, in the past three months, the rate of employment growth in the largest employment sector in Chicago, professional and business services, has picked up, while manufacturing’s rate of employment growth has edged lower in Milwaukee. Regardless, the lessons we can learn from this comparison will make it an interesting one to keep track of in the coming months.

______________________________________________________________________________________[1]These figures reflect State employment data through September 2011.(Return to text)[2]By metropolitan area, we are referring to the U.S. Census Bureau definitions of metropolitan statistical area (MSA) and primary metropolitan statistical area (PMSA), respectively, for Chicago-Naperville-Joliet and Milwaukee-Waukesha-West Allis.(Return to text)[3]Constructing this figure using the broader household survey measure of employment produces a similar result.(Return to text)[4]Joe Taschler, 2011, “Milwaukee area’s job growth leads U.S.,” Milwaukee Journal-Sentinel, October 1, available here; U.S. Bureau of Labor Statistics, 2011, Metropolitan Area Employment and Unemployment Summary, release, November 2, available here.(Return to text)[5]The industry compositions for both Chicago and Milwaukee have changed very little in recent years. The numbers displayed in Figure 3 look essentially identical to the analogous numbers for 2007.(Return to text)[6]A similar exercise was performed with household employment data and achieved nearly identical results across the 37 MSAs and for Chicago and Milwaukee.(Return to text)[7]Because of gaps in reporting, the analysis for durable manufacturing contains only 25 MSAs.(Return to text)

November 10, 2011

Nonmetropolitan counties bouncing back

In terms of income and population growth, nonmetropolitan counties in the Seventh Federal Reserve District states have had their ups and down over the past few decades. The nonmetropolitan population of the Seventh District has not generally kept pace with its metropolitan counterpart—as in many other parts of the country; the nonmetropolitan areas have continued to (modestly) lose population share in recent decades. Despite this continued share loss in population, nonmetropolitan counties have maintained their standing in per capita income since 1969. This maintenance of per capita income has been achieved amid much upheaval in rural industry structure. Production agriculture has tended to slip in relative importance in many nonmetropolitan counties over the long term, although recent strength in crop prices are lifting fortunes in many rural counties. In places where production agriculture has waned over the long term, manufacturing activity has widely become a backstop. In addition, many nonmetropolitan economies have become more prominent destinations for recreation and retirement.

The U.S. population has been urbanizing throughout most of the nation’s history. At its inception, approximately 95% of the nation’s population lived in the countryside. This rural share diminished to about one-half as the twentieth century dawned, and today it amounts to about one-fifth. In the Seventh District, nonmetropolitan counties also account for around one-fifth of the population—ranging from Iowa’s 42.3% of the total population residing in nonmetropolitan counties to Illinois’s 12.8%.

In recent decades, urbanization has continued in the Seventh District, albeit at a much slower pace than it has done historically. The nonmetropolitan population of the District made up 21.5% of the total population in 1969 versus an estimated 20.3% in 2009. During the 1970s, nonmetropolitan counties actually gained population share over metropolitan counties in the District.

As seen below, the nonmetropolitan population grew at a healthy pace during the 1970s, and dropped steeply thereafter during most of the 1980s. The 1990s saw a pickup in nonmetropolitan population, followed again by decline during the most recent decade.

While the population in the Seventh District has continued to shift to metropolitan counties, nonmetropolitan counties have managed to sustain their relative per capita income. Per the chart below, the average nonmetropolitan per capita income gained modestly on that of the metro areas during the 1970s, and then it slipped behind during the subsequent two decades and has rallied somewhat during the past decade. However, within the past two to three years, rising prices of farm commodities—especially those of corn and soybeans—are lifting incomes in many nonmetropolitan counties of the District. The recent rise in agricultural fortunes, along with the farmland boom accompanying it, will be the subject of an upcoming conference here on November 15.

The fact that per capita incomes in nonmetropolitan counties have kept pace with those of metropolitan counties over the long run is somewhat remarkable given the shrinking role of production agriculture in directly generating income and jobs. Farm productivity has soared as farm operators have been able to produce more crops and livestock with less per-unit inputs, especially less labor hours. By way of illustration, per-acre crop yields for two of the Seventh District’s major commodities—corn and soybeans—have doubled since the mid-1960s. Such productivity has enhanced the diets of U.S. households and, increasingly, those of the developing world as well. However, productivity gains have also served to lower real prices of raw farm products over the long term, as the demand for them has not kept pace with rising production. In the process, farm income employs and supports and fewer local workers and households. In the Seventh District today, farm production directly generates only 1-2% of the District’s output and income.

Manufacturing activity has become a major offset to shrinking farm activity in many of the Seventh District’s nonmetropolitan areas. The maps below show those nonmetropolitan counties where the share of income derived from manufacturing activity exceeds the statewide average. In 1969, 53.13% of nonmetropolitan counties could make this claim. By 2009 65.62% of nonmetropolitan counties could do so.

Declining agricultural employment and income account for part of the rising (relative) importance of manufacturing in nonmetropolitan counties. But so do trends favoring a rural location for manufacturing plants as well as a favorable mix of industries that are already concentrated in nonmetropolitan counties. Generally, manufacturing plant location has come to favor nonmetropolitan locations where land prices and transportation costs may be less expensive. The rise of truck and intermodal transportation has especially favored those nonmetropolitan areas with access to highways, along with connections to the more traditional rural roads originally constructed to convey raw farm products. In addition, manufacturing production that is tied to nearby farm products—such as food and ethanol processing—has also performed well, thereby buoying manufacturing employment in nonmetropolitan areas. As the chart below indicates, food processing employment levels in the Seventh District overall have stayed fairly level since 1990, and they have actually gone up in the District’s three more rural states of Iowa, Indiana, and Wisconsin. Over the same period, total manufacturing payroll jobs have declined by 30%.

In many parts of the Seventh District and throughout the U.S., many rural counties have also come to depend on their scenic assets, such as lakes, rivers, and forests, as the basis for economic growth and development. For many rural counties that experienced population and income declines associated with waning agriculture, forestry, mining, and manufacturing, promotion of recreation and retirement can help their reverse their fortunes.

Since employment and income from such activities as tourism (and retirement) are scattered across many statistical categories, researchers Calvin L. Beale and Kenneth M. Johnson have classified recreation-intensive counties by analyzing a variety of data. Their analysis published in 2002 identifies all such “recreation” U.S. nonmetropolitan counties as defined in 1993 (following the 1990 U.S. Census of Population and Housing). Such recreation counties are identified in each of the five Seventh District states, with many of them located in central and northern Wisconsin and northern Michigan. The authors’ find that population growth was higher in recreation nonmetropolitan counties than in other nonmetropolitan counties that continue to depend on farming, mining, manufacturing, and other economic activities. (According to the authors, the same applies to retirement counties—which are defined as those with significant in-movement of older people in the 1980s—relative to other nonmetropolitan counties.) However, they also point out that there may be downsides to the economic development attendant to recreation. Such development may cause environmental stresses on the land and natural resources. Additionally, it can often be in conflict with more traditional economic agricultural activities, such as the raising of livestock. While such conflicts have arisen in the Midwest, more harmonious relationships between agriculture and tourism can also be seen. In particular, agri-tourism and local agricultural sourcing have been on the rise.[2]

Nonmetropolitan areas of the Seventh District states differ widely in their economic performance and structure. On the average, they struggle to maintain population and economic viability. Even though production agriculture has slipped in importance, it continues to drive the income and attendant economic activities in many rural regions. At the same time, manufacturing, recreation, and retirement are often helpful avenues for many nonmetropolitan counties to develop their incomes and populations.
______________________________________________________________________________________[1]For a longer treatment of this topic, see the opening presentation at the recent Chicago Fed conference titled Economic Development in Rural Wisconsin.(Return to text)

[2] See the 2010 Chicago Fed conference titled The Intersection of Midwest Agriculture and Rural Development, available here, as well as the 2009 Chicago Fed agricultural event here. (Return to text)

November 1, 2011

District Economy Update

by Norman Wang and Scott Brave

A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

• Overall conditions: Economic activity in the Seventh District picked up in late November and December. Seventh District business contacts were generally optimistic about the economic outlook for 2012, but many also expressed concern about potential weakness in demand from abroad, particularly from China and Europe.
• Consumer spending: Compared to last year’s holiday season, store traffic volumes were up significantly in December. Auto sales also increased since the last reporting period. Contacts expected sales to continue to improve in 2012, citing a boost from replacement demand in light of the record high average age of vehicles in the U.S.
• Business Spending: Business spending was steady in late November and December and inventory levels were reported to be generally in-line with sales. Hiring remained selective, but the majority of contacts indicated plans to increase employment next year.
• Construction and Real Estate: Construction activity was subdued in late November and early December, but there was some improvement in overall real estate conditions as multi-family construction remained an area of strength and nonresidential construction increased moderately.
• Manufacturing: Manufacturing production growth increased in late November and December. Demand for heavy equipment remained strong and auto production increased over the reporting period. In the steel sector, inventories at service centers remain near desired levels.
• Banking and finance: Credit conditions were little changed during the reporting period. Corporate funding costs, while variable, were largely unchanged on balance. Business loan demand continued to be subdued, and business utilization of credit lines was only up a bit.
• Prices and Costs: Cost pressures eased in late November and December. While pressure on costs remained from commodities such as steel and food, it moderated significantly for cotton and energy goods. Wage pressures remained moderate.
• Agriculture: Prices for corn and soybean rose in the last half of December, though crop prices generally fell during the harvest period. Milk and hog prices fell during the reporting period, while cattle prices increased.

The Midwest Economy Index (MEI) increased to –0.15 in November from –0.30 in October and remained below its historical trend for the fourth consecutive month. However, Midwest growth outperformed its historical deviation with respect to national growth, as the relative MEI increased to +0.04 in November from –0.32 in October largely on the basis of sizeable gains in consumer spending indicators. Estimates of annual growth in gross state product for the five Seventh District states were at or above the national rate of growth through the third quarter of 2011.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.1% in November, to a seasonally adjusted level of 85.8 (2007 = 100). Revised data show the index increased 1.0% in October. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.3% in November. Regional output in November rose 7.1% from a year earlier, and national output increased 4.2%.